Inventory management

Problem 1 DG Computer Supplies Inc. must order floppy diskettes from its supplier in lots of
one dozen boxes. Given the following information, complete the table below and
determine the economic ordering quantity of floppy diskettes for DG Computer
supplies Inc.
Annual demand: 26,000 dozen
Costs per order placed: Rs 30.00
Carrying cost: 20%
Price per dozen: Rs 7.80
Order Size (dozens) 250 500 1,000 2,000 13,000 26,000
Number of orders – – – – – –
Average inventory – – – – – –
Carrying cost – – – – – –
Order cost – – – – – –
Total cost – – – – – –
A college bookstore is attempting to determine the optimal order quantity for a
Problem 2 popular book on psychology. The store sells 5,000 copies of this book a year at a retail
price of Rs12.50, and the cost to the store is 20 percent less, which represents the
discount from the publisher. The store figures that it costs Rs1 per year to carry a book
in inventory and Rs100 to prepare an order for new books.
a. Determine the total inventory costs associated with ordering 1, 2, 5, 10 and 20
times a year.
b. Determine the economic order quantity.
c. Give the reasons for the behavior of total inventory cost calculated in part (a).
The Nanglo Bread Company buys and then sells (as bread) 2.6 million bushels of
Problem 3
wheat annually. The wheat must be purchased in multiples of 2,000 bushels. Ordering
costs, which include grain elevator removal charge of Rs 3,500, are Rs 5,000 per order.
Annual carrying costs are 2 percent of the purchase price of Rs 5 per bushel. The
company maintains a safety stock of 200,000 bushels. The delivery time is 6 weeks.
a. What is the EOQ?
b. At what inventory level should an order be placed to prevent having to draw on
the safety stock? How would your answer change if the delivery time were 12
weeks?
c. What are the total inventory costs, including the costs of carrying the safety
stock?
d. The wheat processor agrees to pay the elevator removal charges if Nanglo Bread
will purchase wheat in quantities of 650,000 bushels. Would it be to Nanglo
Bread's advantage to order this alternative quantity?
Valley Garden Centers sells 240,000 bags of lawn fertilizer annually. The optimal
Problem 4 safety stock (which is on hand initially) is 1,200 bags. Each bag costs valley Rs 4,
inventory carrying costs are 20 percent, and the cost of placing an order with its
supplier is Rs25.
a. What is the economic ordering quantity?
 b. What is the maximum inventory of fertilizer?
c. What will valley's average inventory be?
d. How often must the company order?
Problem 5 Balaju Industries sells high-quality equipment. It has a yearly demand of 15,000
units.

Carrying costs are Rs.0.30 per unit, and the cost of placing an order with its supplier
is Rs.30. The lead-time for placing an order is 5 days. Balaju keeps a 6-day supply on
hand as a safety stock. The purchase price is Rs. 10 per unit. Assume 360 days in a
year.

a. What is the economic order quantity?

b. What is the total cost of EOQ?

c. On average, how many units are sold per day?

d. How much safety stock does the firm have on hand?

e. What is the reorder point?

Koshi Toys, a large manufacturer of toys and dolls, uses large quantities of flesh
Problem 6 colored cloth in its doll production process. Throughout the year, the firm uses
1,250,000 square yards of this cloth. The fixed costs of placing and receiving an order
are Rs 2,000, which includes a Rs 1,500 setup charge at the mill. The price of the cloth
is Rs 2.50 per square yard, and the annual cost of carrying this inventory item is 20
percent of the price. Koshi maintains a 12,500-square-yard safety stock. The cloth
supplier requires a 2-week lead-time from order to delivery.
a. What is the EOQ for this cloth?
b. What is the average inventory rupees value, including the safety stock?
c. What is the total cost of ordering and carrying the inventory, including the safety
stock? (Assume that the safety stock is on hand at the beginning of the year.)
d. Using a 52-week year, at what inventory unit level should an order be place?
(Again, assume the 12,500-square-yard safety stock is on hand.)
The following inventory data have been established for the Sherpa Company.
Problem 7
1. Orders must be place in multiples of 100 units.
2. Annual sales are 338,000 units.
3. The purchase price per unit is Rs 6.
4. Carrying cost is 20 percent of the purchase price of goods.
5. Fixed order cost is Rs 48.
6. Desired safety stock is 12,000 units; this amount is on hand initially.
7. Two weeks are required for delivery.
a. What is EOQ?
b. How many orders should Thompson place each year?
c. At what inventory level should an order be made? [Hint: Reorder point = safety
stock + (Lead time × Ave. Usage) - goods in transit.]
d. Calculate the total cost of ordering and carrying inventories if the order quantity
is (1) 4,000 units, (2) 4,800 units, or (3) 6,000 units. (4) What are the total costs if
the order quantity is the EOQ?
The Balaju Corporation manufactures only one product: planks. The single raw
Problem 8
material used in making planks is the dint. For each plank manufactured, 12 dints are
 required. Assume that the company manufactures 150,000 planks per year, the
demand for planks is perfectly steady through the year, that it costs Rs 200 each time
dints are ordered, and that carrying costs are Rs 8 per dint per year.
a. Determine the economic order quantity of dints.
b. What are total inventory costs for Hedge (total carrying costs plus total ordering
costs)?
c. How many times per year would inventory be ordered?
Cash management
Lockbox System
Problem 4 Koshi oil Inc. operates a mail order for doing business on the west region. Koshi
receives an average of Rs 325,000 in payment per day. On average it takes 4 days from
the time customers mail checks until Koshi receives and process them. Koshi is
considering the use of a lockbox system to reduce collection and processing float. The
system will cost Rs 6,500 per month and will consist of 10 local depository banks and a
concentration bank located in Kathmandu. Under this system, Customer’s checks
should be received at the lockbox locations 1 days after they are mailed, and daily
totals will be transferred to Kathmandu using wire transfer costing Rs 9.75. Assume
that Koshi has an opportunity. Cost of 10 percent and that there are 52 × 5 = 260
working days, hence 260 transfers from each lockbox location, in a year.
a. What is the total annual cost of operating the lockbox system?
b. What is the annual benefit of the lockbox system to Koshi?
c. Should Koshi initiate the system?

Dukuti Corporation began operation 5 years ago as a small firm serving customers in
Problem 5
the Pulchwok area. However its reputation and market are grew quickly, so that
today Dukuti has customers throughout the entire Valley. Despite its broad customer
base, Dukuti has maintained its headquarters in Pulchwok and keeps its central billing
system there. Dukiti's management is considering an alternative collection procedure
to reduce its mail time and processing float. On average, it takes 5 days from the time
customers mail payments until Dukuti is able to receive, process, and deposit them.
Dukuti would like to set up a lockbox collection system, which it estimates would
reduce the time lag from customer mailing to deposit by 3 days-bringing it down to 2
days. Dukuti receives an average of Rs 1,400,000 in payments per day.
a. How many days of collection float now exist (Dukuti's customers’ disbursement
float) and what would it be under the lockbox system? What reduction in cash
balances could Dukuti achieve by initiating the lockbox system?
b. If Dukuti has an opportunity cost of 10 percent, how much is the lockbox system
worth on an annual basis?
c. What is the maximum monthly charge Dukuti should pay for the lockbox
system?
The Toyota Company currently has a centralized billing system. All customers make
Problem 6
payments to the central billing location. It requires, on the average, 4 days for
customer’ mailed payments to reach the central location. An additional day and a half
is required to process payments before a deposit can be made. The firm has a daily
average collection of Rs 500,000. The company has recently investigated the possibility
of initiating a lock-box system. It has estimated that with such a system, customers
mailed payments would reach the receipt location two and one-half days sooner.
 Further, the processing time could be reduced by an additional day because each lock-
box bank would pick up mailed deposits twice daily.
a. Determine how much cash would be freed up (released) through the use of a
lock-box system.
b. Determine the annual gross rupees benefit of the lock box system, assuming the
firm could earn a 5 percent return on the released funds in part (a) by investing in
short-term instruments.
c. If the annual cost of the lock-box system will be Rs 75,000, should such a system
be initiated?
Working capital management
The Sivaka Corporation has as inventory conversion period of 60 days, a receivable
Problem 1
conversion period of 36 days, a payables deferral period of 24 days.
a. What is the length of the firm's cash conversion cycle?
b. If Sivaka's annual sales are Rs 3,960, 000 and all sales are on credit, what is the
average balance in accounts receivable?
c. How many time per year does Sivaka turn over its inventory?
d. What would happen to Sivaka's cash conversion cycle if, on average, inventories
could be turned over 8 times a year?
The Binaka Corporation has an inventory conversion period of 75 days, a receivables
Problem 2
collection period of 38 days, and a payables deferral period of 30 days.
a. What is the length of the firm’s cash conversion cycle?
b. If Binaka’s annual sales are Rs 3,421,875 and all sales are on credit, what is the
firm’s investment in accounts receivable?

b. How many times per year does Binaka turnover its inventory?
Cash conversion cycle and return on assets
Problem 5 The Family Corporation is trying to determine the effect of its inventory turnover ratio
and days sales outstanding (DSO) on its cash flow cycle. Family's 1995 sales (all on
credit) were Rs 180,000, and it earned a net profit of 5 percent, or Rs 9,000. The cost of
goods sold equals 85 percent of sales. Inventory was turned over 8 times during the
year, and the DSO, or average collection period, was 36 days. The firm had fixed
assets totaling Rs 40,000. Family's payables deferral period is 30 days.
a. Calculate Family's cash conversion cycle.
b. Assuming Family holds negligible amounts of cash and marketable securities,
calculate its total assets turnover and ROA.
c. Suppose Family's managers believe that the inventory turnover can be raised to
10 times. What would Flamingo's cash conservation cycle, total assets turnover,
and ROA have been if the inventory turnover had been 10 for 1995?
The Bohara Corporation is trying to determine the effect of its inventory turnover ratio
Problem 6
and days sales outstanding (DSO) on its cash flow cycle. Bohara's 2002 sales (all on
credit) were Rs 150,000, and it earned a net profit of 6 percent, or Rs 9,000. It turned
over its inventory 5 times during the year, and its DSO was 36.5 days. The firm had
fixed assets totaling Rs 35.000. Christie's payable deferral period is 40 days.
a. Calculate Bohara's cash conversion cycle.
b. Assuming Bohara hold negligible amount of cash and marketable securities,
calculate its total assets turnover and ROA.
 c. Suppose Bohara's managers believe that the inventory turnover can be raised to
7.3 times. What would Bohara's cash conversion cycle, total assets turnover, and
ROA have been if the inventory turnover had been 7.3 for 2002?
Working capital financing needs:
Problem 7 Exide Corporation is a leading Asian producer of automobile batteries. Exide turns
out 1,500 batteries a day at a cost of Rs 6 per battery for materials and labor. It takes
the firm 22 days to convert raw materials into a battery. Exide allows its customers 40
days in which to pay for the batteries, and the firm generally pays its suppliers in 30
days.
a. What is the length of Exide's cash conversion cycle?
b. If Exide always produces and sells 1,500 batteries a day, what amount of working
capital must it finance?
c. By what amount could Exide reduce its working capital financing needs if it was
able to stretch its payables deferral period to 35 days?
d. Exide’s management is trying to analyze the effect of a proposed new production
process on the working capital investment. The new production process would
allow Exide to decrease its inventory conversion period to 20 days and to increase
its daily production to 1,800 batteries. However, the new process would cause the
cost of materials and labor to increase to Rs 7. Assuming the change does not
affect the receivables collection period (40 days) or the payables deferral period
(30 days), what will be the length of the cash conversion cycle and the working
capital financing requirement if the new production process is implemented?